As we begin 2019, the energy markets and the stock markets are experiencing incredible volatility. Both underwent steep declines during the latter part of last year.
How might this play out in 2019?
Below are my predictions for some of the significant energy trends I expect this year. As I often point out, the discussion behind the predictions is more important than the predictions themselves. That’s why I provide extensive background and reasoning behind the predictions.
I also provide predictions that are specific and measurable. At year’s end, there are specific metrics that will indicate whether a prediction was right or wrong.
1. Oil prices will rise at least $25/bbl in 2019
Six months ago, when oil prices were pushing above $70/bbl, I was preparing to make a more conservative oil price prediction for 2019. I thought the price rise would slow heading into 2019, but what I didn’t foresee was the collapse in prices that took place in the second half of 2018.
That collapse in oil prices makes this prediction a lot easier. The price of West Texas Intermediate (WTI) closed the last day of 2018 at $45.15/bbl, after falling $30/bbl in the last three months of the year. Oil closed $15/bbl lower than it opened the year. Meanwhile, U.S. crude oil inventories are almost exactly where they were a year ago.
The difference is in the perception of where the oil market is going. Market bears foresee electric vehicles taking a larger bite out of oil consumption, and they see continued growth of U.S. oil production contributing to an oversupply of crude oil globally. They are also concerned about an economic slowdown.
OPEC is the wild card here. A big reason oil prices collapsed is that President Trump convinced Saudi Arabia to increase production to make up for oil that would be lost as a result of Iranian sanctions. But at the last minute, the Trump Administration granted generous exemptions to allow countries to continue importing Iranian oil. These exemptions are supposed to be for 180 days, but they suddenly created too much oil in the market.
Saudi Arabia was furious, and they immediately cut oil production. At the next OPEC meeting, the cartel agreed to cut production to balance the market. I expect they will have success with this strategy in 2019, the same way they did the last time they went down this path. OPEC hasn’t lost its pricing power yet, as long as they maintain discipline. I expect their previous success will be repeated this year. The U.S. Energy Information Administration projects that WTI will average $54/bbl in 2019. I think that’s too conservative.
It’s hard to project an average price, because I don’t know how long it will be before sentiment shifts. And there are still going to be those who think electric vehicles are soon going to put oil out of business. Those sentiments will impact prices. But I expect that by the end of the year, OPEC’s strategy will be working, and you will see oil prices get back to the $70/bbl level.
2. U.S. oil production growth will slow in 2019 versus 2018
Except for an OPEC-induced dip in production in 2016, U.S. oil production has risen like a rocket since 2011. None of those years was bigger than 2018, when domestic oil production rose by 1.5 million barrels per day (BPD). In the six of seven years since 2011 when production did increase, it rose by an average of one million BPD. While I do expect U.S. oil production to grow again in 2019, I think the combination of lower oil prices to begin the year and a potential economic slowdown stemming from trade tensions will result in a slowing of production growth for 2019.
However, average production for all of 2018 was 10.9 million BPD. By the end of the year this level had reached 11.7 million BPD. Thus, it won’t take much of a rise to add another average of one million BPD to 2018 levels. I believe this will happen, but I don’t believe we will add a million BPD from the year-end level of 11.7 million BPD (as we did in 2018). All we need to do is sustain another 300,000 BPD in 2019 to year-end 2018 levels to average a million BPD over 2018. I can see that happening, but I don’t see a repeat of 2018’s huge growth.
3. Despite President Trump’s best efforts, gasoline prices will end the year at least $0.30/gallon higher than they began the year.
I typically make a natural gas prediction, but the fundamental picture is mixed. Inventories are still extremely low, which should call for higher prices. But natural gas prices are quite low to start the year. If the inventory picture improves, they will stay low. If not, we will see a lot of volatility. It’s a coin flip, so I am going to forego a natural gas price prediction this year.
But here’s one where I think the picture is clearer. On New Year’s Day, President Trump tweeted:
Gasoline prices have fallen sharply because oil prices have collapsed. President Trump did influence that by conning Saudi Arabia into increasing production and then letting Iran continue to export oil. This prediction is related to my oil price prediction, but I expect that gasoline prices are going to end the year significantly higher than they began the year. Further, December gasoline prices are usually low, because seasonal demand is low (and it’s cheaper to produce winter gasoline).
The price of WTI averaged $65.23/bbl in 2018. Given that we are starting the year nearly $20/bbl below that price, I think it’s unlikely that the 2019 average will top that. In turn, I don’t think the national average 2019 retail gasoline price will top the 2018 average price of $2.81/gallon. But I do think gasoline prices are going to rise well above the year-end price of $2.36/gallon.
On the flip side, U.S. gasoline inventories are currently pretty high, and that will provide headwinds for a while with respect to gasoline prices. They only reached $3.00/gallon during two weeks in 2018, and I think there is a good chance they don’t reach that level at all in 2019. It hinges on how quickly oil prices make a move higher.
I think we will see a gasoline price spike this year, albeit it not as high as in previous years. However, we don’t normally see year-end gasoline prices rise by at least $0.30/gallon higher than the previous year. It has only happened once since 2010, but I predict it happens again this year.
4. The diesel premium over gasoline will at least double in 2019.
One issue that hasn’t gotten nearly enough attention in my view is the impact of a pending deadline that will impact the fuel markets. On January 1, 2020, the International Maritime Organization (IMO) will require the sulfur content in marine fuel to drop from a maximum of 3.5% down to 0.5%. The result is likely to be a spike in the price of low-sulfur marine fuels, which will likely impact several types of fuel. Prices for low-sulfur crude oils will likely expand their premium over high-sulfur crudes, and diesel will likely get more expensive compared to gasoline.
As I pointed out in a previous article, the U.S. began to phase in ultra-low-sulfur diesel (ULSD) in 2006. In the decade prior to the implementation of ULSD, retail gasoline traded on average at a $0.04/gallon premium to retail diesel. In 2005, the year before the phase-in of ULSD began, diesel traded at an average of $0.09/gallon over the price of gasoline. And in the decade following implementation, diesel averaged $0.23/gallon over the price of gasoline.
In 2018, retail diesel prices averaged $3.18/gallon, a $0.37/gallon premium over gasoline. I expect that premium to reach $0.75/gallon in 2019, as suppliers scramble to comply with the new guidelines. However, one wildcard may impact this prediction, and that is that the new rules are postponed to allow more time for compliance. I don’t think that’s likely, but it is possible.
5. Solar sector equities recover by at least 20%
There are some significant disconnects in the energy markets as we begin the year. Master limited partnerships, for instance, are trading far out of sync with the underlying fundamentals, and as a result I expect them to outperform in 2019.
But the largest disconnect is in the solar sector. Concerns about the impact of trade wars and tariffs have negatively impacted sentiment in the solar sector. This resulted in a significant decline in solar stocks in 2018. The MAC Global Solar Energy Index Total Return Index (SUNIDX) is a diversified exchange-traded fund (ETF) that is traded on the New York Stock Exchange. The index covers all major solar technologies and includes companies from around the world. In 2018, it saw its value decline by nearly 30%.
Meanwhile, China’s solar panel exports soared by 66% in the 3rd quarter year-over-year, and numerous countries continued to install record levels of solar power. Costs for solar photovoltaics continue to decline, mitigating part of the tariffs that the Trump Administration imposed in 2018.
I expect that investors will again conclude that the future is very much about solar power, and the long-term growth rates there will continue to be phenomenal despite the negative perceptions of 2018. I predict that solar equities — as represented by the SUNIDX — will rise by at least 20% in 2019.
There you have my 2019 energy predictions. The themes are that U.S. oil production will start to slow, that oil prices will begin to recover because of actions taken by OPEC, that gasoline prices will move higher — but not nearly as quickly as diesel prices — and that solar equities will experience robust returns.